The IRS redesigned Form W-4 in 2020, removing allowances and personal tax exemptions. Now, the form calculates your withholdings based on information such as income, filing status, dependents, and expected credits. This update helps better estimate your total income and withholdings from your employer.
If you start a new job, get married (or divorced), have a baby, or your household income changes for any reason, the amount you owe for taxes will also change. It’s essential to periodically update your W-4 to reflect your current situation to avoid unexpected tax liabilities to the IRS. We’ll cover how Form W-4 has changed and what it means for you.
What was an allowance on Form W-4?
An allowance, sometimes called a personal tax exemption, was used to figure out how much federal tax your employer should take out of each paycheck. Before 2020, you could claim one allowance for yourself and another for your spouse if you were married. Claiming more allowances meant less tax was taken out, so your paycheck was bigger. Claiming fewer meant more tax was withheld and your take‑home pay was smaller.
In 2020, the IRS replaced the allowance system with a new Form W‑4. The updated form is designed to match your actual tax situation more closely. It lets you report changes in income or family circumstances more clearly, which helps prevent having too much or too little tax withheld during the year.
What replaced W-4 allowances?
Allowances have been replaced by a five-step process to calculate the amount withheld from your paychecks. This process uses your income, filing status, number of jobs (or your spouse’s job), and number of dependents to determinehow much of your income will be withheld for federal and state taxes. The redesigned form should make it easier to match your tax liability to your withholding amount.
Step 1: Personal Information
Provide your name, address, Social Security number, and filing status (Single/Married filing jointly/Head of household). This determines the Standard Deduction and the tax rates used to calculate your withholdings.
Step 2: Multiple Jobs or Spouse Works
Indicate whether you have more than one job or if your spouse also works. This step helps the IRS calculate withholding based on total household income, preventing under‑ or over‑withholding.
Step 3: Claim Dependents
List the number of dependents you can claim. This applies the IRS credit amounts to estimate how much your taxable income should be reduced.
Step 4: Other Adjustments (Optional)
Add any additional factors that impact withholding – such as other income not from jobs, itemized deductions, or an extra dollar amount you want withheld each paycheck.
Step 5: Sign and Submit
Review your information, sign the form, and submit it to your employer so they can update your withholding.
Are there allowances on state taxes?
Many states still use allowances on their state tax withholding forms, even though the federal W‑4 no longer does. That means depending on where you live, you may still see a line asking how many allowances you want to claim. For example, California’s DE‑4, Georgia’s G‑4, Hawaii’s HW‑4, and Illinois’s IL‑W‑4 all continue to use withholding allowances to help determine how much state tax is taken out of each paycheck. Other states have moved away from allowances and instead follow a system similar to the new federal form, so it’s worth checking your state’s specific rules to know exactly what applies to you.
How to change your tax withholding percentage without W-4 allowances
Allowances are no longer used to calculate how much money is withheld from your paychecks, but Form W-4 still serves the same purpose. You shouldn’t have to complete a new form if you’ve had the same job and no significant life changes since the W-4 was redesigned in 2020. However, you may want to contact your employer and double-check the information you provided to ensure accuracy. You can adjust your W-4 by providing your employer with an updated Form W-4.
If you start a new job or become unemployed, start a side hustle, get married or divorced, or have a baby, you may want to adjust your W-4. If your spouse gets a new job or significant raise and you typically file jointly, this can impact onyour taxes in the form of the marriage tax penalty depending on your joint income and state of residence.
Determining your withholding if your spouse works
Allowances are no longer a factor when filling out your W-4. However, if you are married and filing a joint return, you will need to consider your spouse’s income when completing Form W-4. Your and your spouse’s income determine your tax bracket and tax liability.
If both of you work, then you should use Step 2 to calculate how much of your income to withhold. Having two incomes on a single return will increase your tax liability. If you require extra withholdings to cover your tax bill, completing Step 2 will help you determine the additional amount to withhold.
If you and your spouse have similar pay, you will both check the box in Step 2 – C when completing your W-4s. Checking this box tells each employer to cut your tax brackets and deductions in half when calculating how much to deduct from your paychecks.
If you do not have a similar pay, use the IRS Tax Withholding Estimator or the IRS Worksheet to estimate your withholding amount. This will help you calculate your estimated tax liability and determine whether you should take extra withholdings to cover your tax bill.
How do I fill out my W-4 if I have two jobs?
Additional income from a second job, self-employment, or side hustle can increase your tax liability. If you work more than one job at the same time, you should complete Step 2 of Form W-4 to determine the amount to have withheld from your paycheck.
This calculation keeps you from withholding more money from your paychecks than necessary. There are three ways to calculate your withholding percentage when you work two or more jobs:
- You can use the IRS Tax Withholding Estimator to calculate how much to withhold and figure out the additional amount you set aside – if any. The estimator will be the most accurate calculation.
- Or you can use the IRS Worksheet to manually calculate your withholding percentage and the additional amount you should have withheld, if any. The worksheet will be slightly less accurate than the IRS Tax Withholding Estimator.
- If you only have two jobs with similar pay, you can check the box in Step 2–C when you complete your W-4s for each job. Checking this box on both forms will indicate to your employers to cut your tax brackets and deductions in half when calculating the amount to withhold from your paycheck.
What happens if too little federal income tax is withheld?
When it comes to federal income tax withholding, striking the right balance is important. The IRS requires individuals to pay taxes on their income throughout the year, and if you haven’t withheld enough, it could result in tax liability. If too little tax is withheld from your paycheck, you might have a tax bill at the end of the year when it’s time to file.
You could even incur a penalty for underpayment of taxes. The IRS expects you to meet certain thresholds of tax payments throughout the year, and failing to do so can lead to added penalties. An underpayment penalty is typically assessed if you owe more than a specific amount ($1,000 for most filers) when you file your tax return. So, it’s essential to regularly review your withholding and adjust it as necessary, especially if you anticipate changes in income sources or tax deductions.
On the other hand, withholding too much can also have repercussions. While you may enjoy a larger tax refund when you file your taxes, over-withholding means you’ve essentially had your money in an interest-free escrow account. This isn’t ideal because it’s money that you could have used for investments, savings, or paying down debt throughout the year. Getting a significant refund could be a sign that you need to adjust your withholdings to have more money in your paycheck during the year. This way, you have more immediate access to your income instead of waiting until tax season to see the benefits.
How to claim an exemption from withholding
There are certain circumstances under which individuals may qualify for an exemption from federal income tax withholding, provided they meet specific criteria. To be exempt, you typically must have had no tax liability in the previous year and expect to have none in the current year. This situation usually applies to students or individuals with minimal income. Even if you qualify for an exemption from federal income tax withholding, you are still required to pay FICA taxes, which fund Social Security and Medicare.
To claim an exemption, you must complete the IRS Form W-4 when you start a job or adjust your withholding for your current job. On the form, you will be able to indicate your exemption status. Please note that if your circumstances change during the year and you no longer qualify for the exemption, you’ll need to submit a new W-4 form to indicate that you are no longer eligible for the exemption.
W-4 allowance and tax withholding FAQs
Need more information? Explore our FAQs below to gain a better understanding of tax withholding and the new W-4.
What happened to W-4 allowances?
In 2020, allowances were replaced with a five-step process that helps you determine how much of your income should be set aside for taxes each pay period. The new W-4 makes it easier to determine your tax liability by the amount withheld for taxes.
Are allowances the same as dependents?
No, but they affected each other depending on the number of allowances you claimed. Claiming fewer allowances meant you received a larger tax refund, while claiming more allowances meant you may have received a tax bill.
For example, if you claimed allowances on your W-4, less money would’ve been deducted from your paychecks for taxes. This, in turn, puts more money back into your pocket to handle dependent care expenses throughout the year. The number of allowances depended on your financial circumstances, filing status, and number of dependents.
Where can I find the new Form W-4?
You can view and download a copy of the new Form W-4 at the IRS website. Once you’ve completed your W-4, look for your Form W-2 to arrive by January of the following year. Take control of your tax filing this year by starting early and ensuring your information is up to date.
How does tax withholding work?
Withholding allows you to set aside a portion of your income throughout the year to reduce your potential liability when tax time comes around. You can do this by completing Form W-4 and turning it over to your employer. They’ll do the hard work of deducting a small amount of your earnings from each paycheck.
